Volatility on the Profit Side

Profits on average farms dropped dramatically in 2009, back to 2002 and 2003 levels

My Road Warrior travels recently took me to address the FINPACK Lenders Conference in Owatonna, MN, south of the Twin Cities. Bob Craven, leader of the FINPACK team of outstanding professionals and educators, presented results of 2009 net farm income from their database that covers seven states.

Volatility is often discussed in terms of revenue and cost, but seldom in profits. Regardless of farm profit classification – i.e. top 20%, average of all farms or low 20% – profits were very stable from 1996 through 2003. For example, the elite profit group’s profits varied $18,000/year over the period, while the numbers showed slightly more than $30,000 variation for the average of all farms, and $16,000 for the low-20% group for crop and livestock farms combined.

The years of 2003 to 2009 were a different story, however, as global markets, ethanol demand and the financial crisis resulted in a rollercoaster ride. Profits per farm varied over $250,000/year for the elite group, peaking out at nearly $450,000. When someone indicated the other day that these are the best of times, they were spot on. The average of all farms showed over $100,000 in variation year-to-year, while the low group surprisingly showed less than $40,000 variation annually, but to the negative.

When one observes average farm profits, they increased from $60,000 in 2003 with an upward trend to 2008, peaking in 2007 at $161,431. It was disturbing that profits on average farms dropped dramatically in 2009, back to 2002 and 2003 levels. This may be in part because of many dairy and hog farms in the database. Another culprit could be cash rents putting a squeeze on margins, along with other variable cost creeps. I cannot wait to see 2010 data to determine if this is a trend.

Tools for Growth Management

One tool in growth management is conducting trend analysis on profits, not only on the average, but deviation from the mean or median over the period. This can be useful in ascertaining working capital and equity backup, as well as structure. Profit volatility examination can be useful in building sensitivity coefficients in cash flow and profit projections in the business plan for growth.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.